Most employee restrictive covenant disputes arise as a result of an employer’s concern about the potential loss of customer relationships and customer goodwill. These disputes generally involve sales representatives or high level business executives that have relationships with key customers; these disputes also frequently involve defenses that the employees had pre-existing business relationships with the customers that should fall outside the non-compete or non-solicitation agreement at issue. These disputes can be very fact-driven and the subject of very different recollections. For these reasons, non-solicitation cases can be especially messy. Unfortunately, a recent case out of the U.S. Court of Appeals for the Sixth Circuit, Hall v. Edgewood Partners Insurance Center, Inc., Case No. 18-3481/3482, highlights a doctrine — that an employee has rights to clients he/she acquired on his/her own time and dime — that may make these cases more complicated, expensive and problematic. Continue Reading Whose Customer Is It Anyway? The Sixth Circuit Further Clouds New York’s Already Murky Law on Non-Solicitation Agreements

The 10-year legal brawl between Goldman Sachs and its former programmer Sergey Aleynikov has spilled over into multiple courts — a federal conviction that was overturned, another conviction by a New York state jury still on appeal today, and finally, the fight in two different courts over payment of his defense fees. While the prosecutions have garnered considerable media attention, the civil litigation over Aleynikov’s demand for advancement of his $10 million in legal fees from Goldman is the most relevant for civil litigators. Why? An order granting advancement, which requires the employer to pay for the former employee’s attorneys fees, can fundamentally alter the course of a trade secret litigation. Last week, the U.S. District Court for New Jersey rejected Aleynikov’s claims for advancement, declining to essentially reconsider a Delaware court’s ruling that Aleynikov had failed to demonstrate that he qualified for advancement under Goldman’s bylaws. As I explain below, the ruling is an important reminder for both employers and employees in trade secret disputes of the power of advancement claims, and the determined resistance an employee may face if he or she pursues that claim.Continue Reading How Sergey Aleynikov’s 10 Year Legal Battle Highlights The Pros and Cons of Advancement Claims in Trade Secret Disputes

The issue of trade secret identification, on its face, seems like an elementary and uncontroversial one. In concept, every trade secret plaintiff should be expected to identify the trade secrets in the lawsuit it brings. After all, the plaintiff knows best what it considers to be a trade secret and what it doesn’t consider to be a trade secret, and the defendant shouldn’t be left to guess what those trade secrets might be. For these and other reasons, California, a key bellwether state for trade secret law, has long required by statute that a party claiming trade secret misappropriation identify those trade secrets with specificity before being permitted to conduct discovery relating to its trade secret claim. However, nothing tests the limits of common sense like the realities of litigation, and plaintiffs in California have complained that this procedure has been misused by defendants to frustrate or derail otherwise meritorious trade secret cases. Perhaps for these reasons, courts outside California remain divided over the so-called California rule as several recent rulings have demonstrated. Continue Reading Are Other States Following California’s Lead On Trade Secret Identification?

Here are the noteworthy trade secret and restrictive covenant posts from September and some of October:

Legislative Developments

Massachusetts is once again contemplating multiple bills regarding non-competes as well as a possible adoption of what appears to be the DTSA advises Russell Beck in his Fair Competition Blog. Russell and his team also have summaries of legislative activity in Maryland, Maine, Michigan, New York, Oregon, Pennsylvania, Washington and West Virginia, among others.

Here are the noteworthy trade secret, non-compete and cybersecurity stories from the past week, as well as one or two that I missed over the past couple of weeks:

Trade Secret and Non-Compete Cases. Posts and Articles:

The reaction from the trade secret community to the recently-released Obama IP Strategy Report has been one of disappointment. Expectations soared after the Obama administration announced its trade secrets initiative in February but the recent Report barely mentions trade secrets. In a post for Orrick’s Trade Secrets Watch, Michael Spillner notes the strategy’s need for a civil cause of action. Likewise, Misty Blair of Seyfarth Shaw’s Trading Secrets Blog observes the Report’s failure to address trade secret protection more comprehensively as “a bit of a surprise.”

“Illinois Appellate Court Requires Two Years of Employment for Postemployment Restrictive Covenants” reports Stacey Smiricky and Trina Taylor of Faegre Baker & Daniels for Lexology. Epstein Becker’s Trade Secrets & Noncompete Blog and Seyfarth Shaw’s Trading Secrets Blog also have posts on the decision. And Kenneth Vanko unloads on the decision in his Legal Developments in Non-Competition Agreements Blog.

In “Contractual Override of Trade Secret Law,” Dennis Crouch details a recent Federal Circuit decision in his Patently-O Blog affirming a New York federal court’s holding that a non-disclosure agreement’s requirement that confidential information be specifically designated trumped state trade secret law holding otherwise. As a result of the plaintiff’s failure to designate the information as “confidential” under the NDA, the court applied California law and held the information could not qualify as a trade secret. Lesson? Don’t include this language in your NDA, because in my experience, parties rarely have the time (or inclination) to designate each and every piece of information as “confidential.”

“Are An Employer’s Business Plans Discoverable In Non-Compete Litigation?” asks Jason Cornell of Fox Rothschild about a case in Ohio for Mondaq.

If you don’t have a non-compete with a Chinese employee, don’t expect to restrain him or her advises the China Bridge IP Law Commentary Blog. In “Why China Supreme Court Agreed with Resigned Employees Establishing Competing Businesses?,” Luo Yanjie details a recent high court ruling explaining Chinese law on this issue.

For The Wall Street Journal’stake on the recent indictment of Chinese turbine manufacturer Sinovel, see “U.S. Looks to Blunt Corporate Espionage by Chinese Firms.”

“You May Not Like Weev, But Your Online Freedom Depends on His Appeal” advisesWired on the appeal of Andrew Aurnheimer of his CFAA conviction.

“There Is Now a Split Within the District of Massachusetts over the Proper Interpretation of the Computer Fraud and Abuse Act” announces Brian Bialas for Foley & Hoag’s Massachusetts Noncompete Law Blog.

Here are the noteworthy trade secret, non-compete and cybersecurity stories from the past week, as well as one or two that I missed over the past couple of weeks:

Trade Secret and Non-Compete Posts and Articles:

Good advice from Josh Durham: “Use Covenants Not To Compete To Protect Legitimate Business Interests, Not Just Because You’re Scared Of A Little Competition.” In his post for Poyner Spruill’s Under Lock & Key Blog, Josh recounts the holding of a recent North Carolina case, Phelps Staffing LLC v. CT Phelps, Inc., in which the court found that a non-compete involving temporary staffing employeees lacked a legitimate business interest to justify the restraint. It is an important reminder to companies to ensure that their non-competes be narrowly tailored to protect interests that actually arise from the former employee’s employment.

Sergey Aleynikov will stand trial a second time, this time in New York State’s Supreme Court, for the alleged theft of Goldman Sachs’ trade secrets, reports The Wall Street Journaland Law360. Judge Ronald Zweibel ruled that the state charges were not barred by the dismissal of his federal conviction under the Economic Espionage Act last year by the U.S. Court of Appeals for the Second Circuit. (For more on the Aleynikov saga, see my posts here and here).

For more on the Ohio Supreme Court’s recent holding that rental payments are trade secret, see Todd Sullivan’s take in his Trade Secrets Blog. Todd notes the incongruity in the Court’s reasoning that disclosure of the trade secrets would lead to a “poisonous” tenant environment, despite the fact that it noted later in its opinion that the landlord’s expert said tenants were incentivized not to share rental information. (My post on the case can be found here).

“Pushing Back Against Restrictive Covenants in Physician Agreements” advocates Mark Gisler as he questions whether non-competes violate the American Medical Association’s code of ethics.

“Looking at the Future of Cybersecurity,” predicts Sue Reisinger for Corporate Counsel.

Computer Fraud and Abuse Act Posts and Cases:

Looking for a post-mortem on the recent CFAA trial of David Nosal? Then check out “In Executive’s Trade Secret Prosecution, a Company’s Outsized Role,” by Vanessa Blum who covered the trial for The Recorder, Venkat Balasubrumani’s post in the Technology & Marketing Law Blog and Daniel Joshua Salinas’ post for Seyfarth Shaw’s Trading Secrets Blog.

Should confidential information shared with a customer lose its trade secret status if it is not accompanied by a confidentiality agreement? Courts are split on this tricky issue, but in State Ex Rel. Lukens v. Corporation for Findlay Market of Cincinnati, the Ohio Supreme Court ruled last week that, in the context of a commercial lease, information shared with tenants (i.e., customers) does not require a confidentiality agreement. (A PDF copy of the opinion can be found below).

Background:The lawsuit was filed by Kevin Luken, an attorney and brother of Mike Luken, proprietor of Luken’s Poultry, Fish & Seafood, a longtime vendor at the Findlay Market in Cincinnati, a popular public market in Cincinnati. According a local media report, Luken sought the records for the sake of “accountability” because he “wanted to see if he was being charged the same rent as his competitors in the historic market.”

Luken requested copies of those leases through a public records request with the City of Cincinnati, but the rental amounts were redacted in the city’s response. The market facility is owned by the City of Cincinnati and managed by the nonprofit Corporation for Findlay Market (the Findlay Market).

Luken filed a writ of mandamus to compel production of the redacted rental information but the First Appellate District located in Cincinnati denied that public records request, reasoning it was protected from disclosure under Ohio’s public records laws because it qualified as a trade secret.

On appeal, the Ohio Supreme Court affirmed that the rental information was a trade secret, focusing on two issues. First, the Supreme Court agreed with the Findlay Market that the rental information was potentially valuable to competitors. The Findlay Market presented expert testimony that the term and rental rate for subleases in the commercial context are secrets closely guarded by property managers and that knowledge of these items about competitors would be “invaluable” to competitors.

The Supreme Court appeared to accept a policy argument — that public disclosure of this information would impair the landlord’s ability to get and keep tenants and “create a poisonous environment” among the tenants, who would inevitably compare notes. Disclosure of the information, therefore, would put the Findlay Market at a competitive disadvantage.

The second point, was in the Court’s view, a “close call” — namely, whether the Findlay Market had taken sufficient precautions to safeguard its trade secrets. Luken presented evidence that the Findlay Market failed to get acknowledgements or agreements from tenants that the terms of the leases were confidential, as well as evidence that some tenants shared the rental terms with vendors.

Nevertheless, the Supreme Court found that the Findlay Market’s actions were adequate to safeguard the trade secrets under industry standards. The Findlay Market kept the only unredacted copies of the leases in a locked fling cabinet and limited access to employees on a need-to-know basis. Significantly, Findlay Market’s expert provided unrefuted testimony that the precautions used by Findlay Market were standard for commercial property managers. The expert further testified that customers were unlikely to share the information because they realized it was to their benefit not to disclose. On this record, the Supreme Court found that Findlay Market had met its burden.

The Takeaways? First, in essence, sharing information with a customer or client does not waive trade secret status; this common sense notion seemed to predominate the Supreme Court’s analysis. Businesses should not be expected to get non-disclosure agreements from their customers over pricing. Given the inherent sensitivities of customer relationships, it should not surprise anyone that a business might not demand confidentiality as a condition of doing business.

Second, given the relatively weak safeguards undertaken by the Findlay Market, expert testimony proved to be critical in this dispute. That testimony assuaged the Supreme Court’s concerns about those efforts as it was heavily rooted on what was standard for the industry. In some respects, this makes sense, as determining what is reasonable may frequently require examining what others in an industry do in similar circumstances. However, it begs the question that if no one treats the information as a trade secret, is it entitled to protection?

Here are the noteworthy trade secret, non-compete and cybersecurity stories from the past week, as well as one or two that I missed over the past couple of weeks:

Trade Secret and Non-Compete Posts and Articles:

As many of you know, the Obama Administration has invited public comments on possible federal trade secret legislation by April 22, 2013. Peter Toren has posted his letter and comments to the Administration on his blog and I would commend everyone to review them and to get their own comments to the Administration if they favor a federal trade secret statute. I am hoping to get my letter and comments finished and posted as well by the end of the week.

Similarly, in “Obama Administration’s Request for Public Comment on Trade Secrets Law Underscores Importance for Companies to Protect Their Proprietary Assets Now,” Robert Milligan has a fine summary on a recent American Bar Association resolution supporting a federal trade secrets civil cause of action in Seyfarth Shaw’s Trading Secrets Blog.

The dismissal of Macy’s breach-of-confidentiality-agreement claim against Martha Stewart Living Omnimedia generated some headlines last week. Bloomberg has a nice summary of the decision, which was issued from the bench.

For the latest on developments in the U.S. v. Nosal trial, see “Ex-KFI Worker Recounts Trade Secret Theft In Hacking Trial’ by Beth Winegarner for Law360 and “Prosecutors Get Key Testimony From Ex-Lover in Hacking Trial,” by Vanessa Blum for The Recorder.

A salesman’s solicitation of his former clients, coupled with his previous access to trade secrets, has led to enforcement of a non-compete spanning six states. In FirstEnergy Solutions v. Flerick, the U.S. Court of Appeals for the Sixth Circuit applied a deferential review of the Ohio district court’s opinion enforcing that one-year non-compete. A PDF copy of the opinion can be found below.

Background: Paul Flerick was a salesman for FirstEnergy. While negotiating the terms of his employment with FirstEnergy, Flerick expressed concerns about the proposed noncompete and attempted to negotiate a revision that would allow him to work for a competitor after leaving FirstEnergy as long as he did not directly contact FirstEnergy’s customers. FirstEnergy refused, telling him that it was a “[c]ondition of hire.” Flerick eventually capitulated and signed the agreement.

After receiving a negative review and reassignment, Flerick joined Reliant Energy, a competitor of FirstEnergy. After his resignation, FirstEnergy reminded him about his noncompete clause, and Flerick said that it would not be an issue. When asked about his plans, he declined to provide any information. Flerick was required to and did return all company-issued electronic devices and all company documents.

When FirstEnergy learned that Flerick was working for Reliant, it sent Flerick a cease-and-desist letter. Reliant’s counsel replied and indicated that Flerick did not possess any confidential information, had not solicited any customers to whom he sold electricity in the year before he left FirstEnergy, and that the provision prohibiting Flerick from working for a competitor was overly broad and unenforceable.

After suing Flerick, FirstEnergy learned (and the District Court found) that Flerick had improperly solicited his largest customer from First Energy (Duke Realty) and that he also improperly contacted other FirstEnergy customers in Pennsylvania, New Jersey, Ohio and Maryland through intermediaries.

The U.S. District Court for the Northern District of Ohio enforced the non-compete reasoning that Flerick had breached it by soliciting his former customers and because he still possessed confidential information that he had obtained while employed by First Energy. The court enforced the non-compete for the full year and in the six states in which First Energy did business.

Last week, the Sixth Circuit affirmed that injunction, ruling that under Ohio state law, violation of the non-compete when coupled with the possession of confidential information was enough to warrant enforcement of that non-compete clause, even one over six states. Applying a very deferential review, the Sixth Circuit emphasized repeatedly the improper solicitations of former clients by Flerick as well as the fact that Flerick understood that the non-compete was a condition of employment. The Sixth Circuit reasoned that Flerick was free to operate in five other states in which FirstEnergy did not do business and was not unduly harmed by the injunction.

The Takeaway: First, it appears that Flerick’s counsel tried the IBM v. Visentin defense — i.e., arguing that efforts to safeguard the legitimate protectible interests of FirstEnergy would obviate the need for a non-compete. However, that effort was doomed by subsequent disclosure that Flerick had improperly solicited FirstEnergy’s clients.

Second, this opinion demonstrates the deferential review accorded a trial court in injunctive relief proceedings and the importance of prevailing at the trial court level. The trial court was clearly unhappy about Flerick’s solicitation of his former customers and enforcement of a non-compete throughout six states seems severe. However, the Sixth Circuit refused to disturb the injunction.

Finally, I have to confess I was disappointed with the Sixth Circuit’s further justification for the non-compete because of Flerick’s exposure to trade secrets of First Energy. Extended to its logical conclusion, any non-compete would be fully enforceable on this basis because most employees are inevitably exposed to confidential information of their former employer. Had the Sixth Circuit simply left the need to protect customer relationships as the basis for the non-compete, it would have been more than enough since it was Flerick’s improper pursuit of those customers that drove the injunction.

Last week, I reported on Nos. 10 through 8 of the Trade Secret Litigator’s Top 10 Trade Secret and Non-Compete of 2012. Here are Nos. 4 through 7, with the top three to follow this weekend:

7. PhoneDog v. Kravitz (U.S. Dist. Ct. for Northern Dist. of Cal.), Eagle v. Morgan (U.S. Dist. Ct. for Eastern Dist. of Penn.) and Christou v. Beatport (U.S. Dist. Ct. Col. May 2012). As employers continue to grapple with managing their employees’ use of social media, these three cases illustrate the consequences that can flow from uncertainty over who owns social media property such as a Twitter handle, a LinkedIn account or password log-in information. As trade secret claims are tougher and tougher to assert because of the inherent visibility of social media information, employers can be expected to rely more on traditional claims of ownership for social media as a result of these cases.

PhoneDog v. Kravitz and Eagle v. Morgan have both received considerable media attention as they are among the first cases to address ownership of LinkedIn and Twitter accounts. However, because they arose in situations where the employers failed to have formal policies or written agreements establishing the parameters for the ownership of social media, the employers were unable to secure conclusive determinations and forced to litigate the cases. Indeed, in the PhoneDog case, the employee was able to keep the disputed Twitter handle as part of the settlement. Ultimately, disputes like these will be less frequent as employers recognize the importance of policies and written agreements in ensuring that their social media accounts and log-in information remain their property. For more on these cases, please see my posts here and here.

6. Acordia of Ohio v. Fishel (Supreme Court of Ohio) and DePuy Orthopaedics, Inc. v. Waxman (1st App. Dist. Florida). In a year in which it became more difficult to enforce non-compete agreements, these decisions stood out because they held that in the context of a merger, non-compete provisions would survive and be enforced to the benefit of the new company. The Acordia of Ohio case raised eyebrows here in Ohio because the Ohio Supreme Court initially declined to enforce the non-compete on the grounds that the covenants at issue did not specifically provide for assignment or have language establishing that they would benefit any successor or assign of the employer. However, in a highly unusual development, the Ohio Supreme Court agreed to reconsider the decision and reversed itself in October.

5. U.S. v. Liew (U.S. Dist. Ct. for Northern Dist. of Cal.). Why is a criminal case that has not even gone to trial and in which one of the major defendants was dismissed No. 5 in the Trade Secret Litigator’s Top 10? The timing of this case and the willingness of the U.S. Department of Justice to indict a company (Pangang Group) owned by officials of the Chinese government are the reasons for its inclusion, as this case may ultimately be remembered as the tipping point in cementing the perception that China was a threat to the trade secrets of American companies.

It is important to remember that the unprecedented indictment of Pangang Group took place in February when Chinese Vice President Chair Xi Jinping was visiting the United States. Prior to that visit, complaints about the misappropriation of the trade secrets were largely perceived as anecdotal. In my view, there seemed to be a hesitancy on the part of many to complain about the perceived lack of protection of trade secrets in China, perhaps because raising these concerns might result in retaliation or that those raising them might be accused of racism.

However, about the time of that visit, leading media, including The Wall Street Journal and The New York Times ran a number of articles highlighting the complaints of many U.S. companies about the failure (or in some cases, the active participation) of the Chinese Government in cases of trade secret theft. During that visit, Vice President Joe Biden and Senator John Kerry both were reported to have expressed concern about, among other things, the complaints of their constituents about the theft of trade secrets.

In this context, the announcement of the indictment of Pangang Group signified an acknowledgement of the federal government to not only recognize the problem but take forceful action to combat it. It also served as a catalyst for media attention, which in turn brought concerns about protection of trade secrets in China to the surface.

4. American Chemical Society v. Leadscope (Ohio Supreme Court), SASCO v. Rosendin Electric (California 4th App. Dist.), MPI Release, LLC v. Loparex LLC (U.S. Dist Ct. for Southern Dist. of Indiana), and Best Medical Int’l v. Spellman (U.S. Dist. Ct. for Eastern Dist. of Pa.). These four cases highlight the increasing dangers that can arise from an ill-advised trade secret case as they all involved awards against plaintiffs who were essentially found to have brought their trade secret cases in bad faith.

The American Chemical Society case resulted in a jury verdict of over $26.5 million in compensatory and punitive damages in favor of the defendants, former employees who counterclaimed and successfully argued the underlying trade secret litigation against them was brought maliciously to destroy their company (it ultimately settled for about $20 million). In SASCO, a California appellate court affirmed a significant award of attorneys fees after a plaintiff dismissed a weak trade secrets case.

The increasing frequency of these cases should serve as a powerful reminder that companies considering trade secret claims need to carefully evaluate those claims and remember the power of the “David v. Goliath” narrative in trade secret cases.

Stay tuned for Nos. 1 through 3 this weekend.

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I’m a Columbus, Ohio-based attorney with a national legal practice in trade secret, non-compete, and emergency litigation. Thanks for visiting my blog. I invite you to join in the conversations here by leaving a comment or sending me an email at jmarsh@baileycav.com.

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